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“Reality check at the bottom of the pyramid” is the title of a journal article written by Erik Simanis in 2012. As the title suggests, the author focuses on explaining the consumption and purchasing behavior of consumers in low-income regions and weak economies. Simanis explains the various reasons for the failure of past strategies deployed by business enterprises, and he provides the necessary solutions to be successful in developing countries. According to his findings, most entities in these regions fail to realize profits because of the application of the “low price, low margin, and high volume” model (Simanis, 2012). He argues that expenses related to product retention, distribution, customer acquisition, and other operational costs are usually high in low-income regions, and therefore, require extremely high sales volumes for break even. Based on the model, a company will need 30% or more of the target market to realize profits, which is almost impossible to attain. However, the journal article provides several solutions that are related to boosting margins and increasing prices. The strategies to boost margins and cover operational costs include the use of customer peer groups, enabling services, and selling localized base products as a bundle.
An effective pricing strategy acts as a crucial factor in positive financial performance in a company. Therefore, the management of a company must conduct proper planning that includes market research and production costs. A strategic pricing model must target customer satisfaction, sales maximization, long-term survival, and generation of maximum profits. For decades, business enterprises operating in developing countries tend to lower their prices to attract more customers. Such companies expect to sell large amounts of their products to generate favorable profits. According to Simanis 2012, a low pricing strategy may demand 30 or more percentage share of the market to realize benefits. Mark Martin, the president of international marketing for SC Johnson, supports the argument and indicates that consumers at the bottom of the pyramid make small purchases at a time (Gunther, 2014). Therefore, a company needs to sell to "lots and lots" of consumers to compensate for the operational costs and maximize profits. Major companies in the past have encountered this challenge, which seems to validate the arguments raised by Simanis and Martin. For instance, in 2001, Procter and Gamble launched a water purification product (PUR) at a low price to target low-income consumers. Despite gaining a substantial market share, the product was a commercial failure, and the company later surrendered the product to a philanthropic enterprise (Gunther, 2014).
Companies have come across several challenges in their quest to solve the needs of consumers in low-income regions while making profits. Barriers such as poor infrastructures and consumer behavior tend to raise the operational costs in these areas (Simanis & Duke, 2014). When the expenses are high, and prices of the finished products are low, companies are likely to incur significant losses and fail or remain small scale ventures forever. Anthropologists say that consumers in weak economies show behavior that lacks cultural competence for product consumption (Simanis, 2012). These consumers are not used to experimenting and using newly introduced products. They resist new products mainly because of the cultural and social routines, as well as their ingrained mindsets. For instance, companies providing bed nets treated with insecticides have faced rejections in some African countries in the sub-Saharan areas. It is because of the misconceptions held by the targeted consumers on the transmission of malaria. Also, due to illiteracy, business enterprises have failed to find enough marketing personnel (Simanis and Duke 2014). Therefore, the successful launching of a new product in these areas requires a massive investment in learning programs.
Poor infrastructure, including shoddy roads, also constitutes the challenges firms face while operating in developing countries. Inadequate and poor infrastructures prevent consumers from accessing distant enterprises, while firms also incur huge expenses on the transportation and distribution of products to the clients’ premises. The journal revealed that attempts to expand the business enterprises are most likely to reduce their efficiency and increase the marginal costs (Simanis, 2012). Therefore, this forces companies to operate in small areas and focus on local distribution in the villages. For instance, Essilor International, a French eyeglasses company, initiated a program that aimed at helping rural communities in India using vans. The company used the vehicles as the eye clinics to serve their clients with vision problems. However, poor road conditions affected the cars, and the firm could not continue with the program due to low revenues and high expenses (Simanis 2014. therefore, the plans of the company to expand its services to nearby regions have ever since stalled.
However, the low-income countries comprise of over 4 billion people, which makes the areas to be potential markets for a variety of products. Despite the obstacles, firms can still generate profits from the consumers in the bottom pyramid if they address the primary challenges in this particular market. For instance, companies can use customer peer groups to solve problems related to product rejection and cultural understanding. These groups consist of individuals who relate and share the same identity with the consumers. Their role is to influence the decisions of the clients towards purchasing the intended product (Banerjee, 2016). They play a significant role in persuading others to change their ways of viewing things and consider new ways of life. The companies can also realize profits by offering enabling services to consumers. There is a need for consumer education to enable the clients to gain the necessary knowledge on how to use the products (Peter, 2013). Over recent years, there have been complexities to consumerism and an increase in goods and services. Therefore, consumer education is necessary to facilitate an easy understanding and decision making on the desired products. Unlike previous strategies that advocate for low product margins, market analysts have recently suggested that selling products in bundles can increase profits. After consumer education and product experience, firms should provide products in packages to sustain the relationship and save the client's time. Furthermore, this strategy enables firms to sell more products in every transaction and satisfy the multiple needs of the consumer.
In conclusion, for the past decades, most business enterprises operating in developing countries prefer the low price and high volume approach. The strategy has resulted in the commercial failure of several products since it requires firms to sell unattainable amounts to generate profits. The main reasons for the failure of these products relate to extremely high operating costs resulting from poor infrastructures. Cultural setbacks and unwelcoming mindsets can cause rejection of new products or companies. However, the articles have indicated that companies can overcome these challenges and realize profits. They can achieve this by conducting consumer education, which can assist in raising awareness of the functionality of the product to the consumers. As a result of illiteracy, the use of local peer groups can ensure the successful implementation of education programs and marketing approaches. Companies should also offer products in bundles to satisfy a variety of consumers' needs. In doing so, the firms develop rich consumer experience and enjoy a positive relationship and reputation in society.
Banerjee, S. (2016). Moderating Effect of Peer Group Environment on Consumer Predisposition Towards Premium Promotions: A Study on Young Urban Consumers in India. IIMB Management Review, 28(4).
Gunther, M. (2014). The Base of the Pyramid: Will Selling to the Poor Pay Off? The Guardian. https://www.theguardian.com/sustainable-business/prahalad-base-bottom-pyramid-profit-poor
Peter, C. (2013). Consumer Education in a Developing Country: The Use of a Stratified Random Sample Survey. International Journal of Management, 30(2).
Simanis, E., & Duke, D. (2014). Profits at the Bottom of the Pyramid. Harvard Business Review. https://hbr.org/2014/10/profits-at-the-bottom-of-the-pyramid
Simanis, E. (2012). Reality Check at the bottom of the pyramid. Harvard Business Review. https://hbr.org/2012/06/reality-check-at-the-bottom-of-the-pyramid
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